WestRock Co (WRK) Q1 2019 Earnings Conference Call Transcript

Let's become to costs at the quarter; costs were a stronger headwind than we anticipated. ordinary gas prices spiked to more than $4.50 per MMBtu. wood prices, specially hardwood prices, consume been elevated though the wood baskets we tug from, remain excessively wet. Somewhat offsetting the shock of higher ordinary gas and wood fiber, the shock of storm Michael at our Panama city factory was $14 million favorable to our guidance. This is a testament to the tenacity of our team .

The corrugated Packaging division sales though the first fiscal belt were $2.7 billion, this was an amplify of 24% at length year. The amplify was owing to the KapStone acquisition and improved allowance and mix. Our North American corrugated adjusted EBITDA margins were 21%, though the KapStone acquisition, excluding Victory, was essentially impartial to our overall adjusted EBITDA margins.

Our 21% margins were even stronger than you energy deem when you deem that the losses incurred at our Panama city factory reduced our North American corrugated margins by 130 foundation points at the quarter.

In our first fiscal quarter, we achieved record box shipments, which were up 13.5% year-over-year. Our legacy WestRock North American corrugated box shipments increased 3.1% year-over-year at a per engagement foundation and this was also a record. We've had a streak of 20 consecutive months of higher growth than the industry average. at this time period, our legacy WestRock cumulative shipments consume increased by 5.3%, at compare to the industry's growth, excluding WestRock of 1.3%. if you change to tons, this incremental growth at the industry median is match to almost 200,000 tons of consumption. This operation has been enabled by our differentiated strategy, manufacture offering, and means to customers.

Okay. Let's report almost how our machinery solutions further to our differentiated strategy. The amount of machines we've installed has grown from 2,100 to 2,500 at the past 20 months. machinery supports customers consuming more than 1.5 million tons or almost one out of each four of our 6 million tons consumed annually though the produce of boxes. The 6 million tonnes includes KapStone, and KapStone victory equip an expanded lay of customers that can accept favour of our differentiated manufacture and service offerings.

In January, our North American corrugated box appeal continues to exist strong, with legacy WestRock box shipments organically growing at higher than 4% year-over-year, with most of the month complete.

While our box volumes increased at the first quarter, we saw lower containerboard volumes at domestic and export markets. Export prices were materially higher than the preceding year quarter, quiet they were lower than the September quarter.

I'm going to accept a minute now to dispute our inventory levels, and to equip context, preceding to the completion of the acquisition of KapStone, we had no visibility into how KapStone operated their factory system, and this includes their means to establishing their inventory levels.

So the belt progressed, our mills ran well. We met our customers' appeal at coarse three of our channels and we gained visibility into our combined system equip and demand. though the belt progressed, it became apparent, we were carrying more inventory than we needed, and at fact, at the goal of December, we were holding almost 100,000 tons of excess inventory.

So at this quarter, the modern quarter, we are reducing our inventories to natural levels, and we are matching our produce to our customers' demand. at January we initiated our inventory reduction with 35,000 tonnes of produce slow backs. The shock of this is incorporated into our guidance, that Ward will dispute at a few minutes.

Let's report at more detail almost Panama city and I'm pleased to clarify Panama city returned to complete produce of containerboard during November. However, though we've reported, the break has been severe, and we don't desire the factory to reply to complete pulp produce until the goal of the June quarter. I'm thanking coarse of our employees, contractors and their families throughout WestRock though your difficult task and hind at recovering accordingly quickly from this ordinary disaster. It has been incredible.

Now to the econmic impact, hurricanes Florence and Michael impacted the belt by $31 million or $0.09 of adjusted earnings per share. We desire to recoup, a important quantity of these losses across insurance reimbursements at the coming quarters, net of the $15 million deductible.

Our Florence, South Carolina prose machinery plot is at list and at budget. We desire to accept our first tool deliveries next month, and we persist to desire the plot to exist completed at the first half of fiscal 2020.

Now onto Brazil; the Brazil team delivered conspicuous results with adjusted division EBITDA margins of 27.7%. Our new world-class Porto Feliz box plant is running, and we made our first box from our newly installed Flexo Folder Gluer final week. Our previous announced plot of the Tres Barras factory is noise beneath way. though a reminder, we desire that when the box plant and factory projects are complete, they will amplify Brazil's adjusted EBITDA by more than 125% at margins -- EBITDA margins to at 30%.

Turning to KapStone; we've already made important further at integrating the KapStone operations into our North American corrugated Packaging business. The mills and box plants consume been successfully rolled into our management and operating bargain structures, and the tool of joint systems and processes is beneath way. We've had some quick wins by leveraging the size and scale of WestRock's purchasing spend, and our commercial teams are making good progress.

At the goal of December, we've achieved a $30 million flow worth of synergies and operation improvements, and we've been able to expend more time at the mills and box plants, and we consume confirmed that the opportunities though productivity improvements that we anticipated at the time of the -- we announced the KapStone acquisition, are there. We consume proven capabilities to optimize the allowance structure and operations of the great mills, though we've done with Smurfit-Stone, Tacoma and the SP Fiber mills. We're seeing the benefits of our expanded geographic footprint and enhanced manufacture offering.

Victory Packaging has created opportunities though us to use their warehouse space to serve legacy WestRock customers. We desire to integrate more than 60,000 tons of annual box produce to our victory locations by the goal of March, and we persist to desire to come $200 million at synergies and operation improvements by the goal of fiscal 2021.

In our Consumer Packaging segment, our sales of $1.6 billion represented an amplify of 1% at length year. Our results muse the flow-through of previously published allowance increases, and productivity improvements that were offset by input costs and earnings inflation. We are seeing appeal growth at many goal markets, these embrace food service, liquid packaging, beverage and retail food. Gains at these goal markets are tempered by the ongoing secular declines of cigarette and media.

Demand across our paperboard substrates is strong. CNK is tight. CRB appeal remainder good and SBS volumes are steady. Our paperboard backlogs were noise at the quarter, they are currently among four weeks and seven weeks.

We're implementing the previously published allowance increases across each of our consumer prose grades, at accordance with our agreement terms. And though a reminder, the Pulp & prose Week published allowance increases influence almost half of our business, with the remaining bargain based at mechanisms no direct tied to these indice.

Adjusted division EBITDA at the belt was $216 million. Adjusted division EBITDA was down $19 million year-over-year, chiefly owing to higher inflation and lower volumes that were partially offset by favorable price, blend and productivity.

We will install a new curtain coder at our Mahrt factory during March, and at April, we will upgrade one of our three prose machines at Covington. And then at June will replace the leading box at our Demopolis mill. These three projects consume required comprehensive equip safe planning, including protection inventory to hind our customers at further of the outages. The projects will tender earnings at the second and third fiscal quarters. Once these projects are implemented, we will operate a consumer factory system that will exist lower cost, equip even a higher characteristic prose though our customers.

Sales at our beverage bargain grew by almost 10% year-over-year. Our beverage machinery offering is an important divide of our differentiated solutions, that helps our customers become their sales and diminish their cost. Our sum installed base of almost 1,000 machines supports almost 330,000 tons of carton sales annually, or 70% of our sum beverage carton sales.

Many of our customers are interested at reducing or replacing their flexible packaging with paper-based packaging. We've implemented solutions at the food service and retail food markets to replace flexible containers with paperboard, cartons and trays. We've sold machinery solutions into the beverage impartial to replace printed film multi-packs with paperboard. WestRock is uniquely positioned to assist our customers shift to more sustainable packaging, with our different manufacture and capacity offerings.

Although we clarify at two segments, our tactic is focused at serving our customers with our broad portfolio of prose packaging, merchandising, machinery and equip safe solutions. We consume more than 130 customers that buy more than $1 million from each of our segments. This accounts though almost $60 billion or a few bit at 30% of our annual sales. The energy of our broad portfolio enables us to unite WestRock's products and services, ones that invent sole winning solutions at the marketplace, ones that our customers value, and ones that invent appraise though our stockholders.

That completes my comments at the quarter. Now, I'll become it at to Ward.

Ward Dickson -- Director, Executive Vice principal and head econmic Officer

Thank you, Steve. Turning to glide 8, we plot our key assumptions though our fiscal second belt 2019 guidance. We desire adjusted division EBITDA at the second belt to exist among $700 million and $735 million, though compared to $733 million at our first fiscal belt and $649 million final year.

Walking across the sequential bridge; favorable pricing and slightly higher volume and our consumer division will exist partially offset by higher scheduled maintenance downtime, though a net amplify of $10 million to $15 million. Pricing is higher owing to the continued flow-through of previously published allowance increases.

Continuing down the sequential bridge, we desire the shock of a complete belt of KapStone's results to further almost $45 million to $50 million at additional adjusted division EBITDA.

In our Corrugated segment, we desire adjusted division EBITDA to exist negatively impacted by $20 million to $45 million, due chiefly to factory maintenance downtime and the actions that we are taking to diminish our inventory. Volumes across coarse three sales channels are expected to exist stable. We desire sequential inflation though the sum company of almost $45 billion, greatly owing to annual wage and advantage allowance increases, and the restart of payroll related taxes. Other input costs are moderately higher, chiefly increasing maiden fiber costs, though a arise of the moist weather. This input allowance inflation to exist partially offset by expected lower ordinary gas prices.

We desire increased acquisition related depreciation and amortization price of $0.08 per share. at addition, advantage price will also exist sequentially higher to clarify though a complete belt of KapStone ownership and higher advantage rates, impacting the belt by almost $0.10 a share. We desire an adjusted tax worth of almost 24.5% versus the adjusted 23.3% worth reported at the fiscal first quarter.

Considering our guidance though the second quarter, we now forecast fiscal year 2019 adjusted EBITDA to exist almost $3.5 billion, a lean reduction from our previous guidance. though our complete year guidance used to suggest, the second half of the year will responsible exist much improve than the first though multiple reasons. Our scheduled factory and maintenance outages across our system occur during fiscal first across third quarters, and we consume no scheduled outages at the fourth quarter. We will consume rebalanced our inventory levels across our containerboard system. Our Panama city factory is expected to exist fully operational by the goal of June and to no longer consume a negative shock at earnings. We desire to make the insurance recovery from loss profits at the second half of the year, which will flow across our P&L.

We will attain complete realization of the previously published PPW allowance increases across the consumer paperboard grades at the second half of the fiscal year. We will make increased synergies from the optimization of the KapStone containerboard factory and box plant system. We desire that volumes at the aid half of the year will exist seasonally stronger, coupled with seasonally lower wood and energy cost. We consume adjusted our main expenditure worth though fiscal 2019 from $1.5 billion to $1.4 billion.

With the completion of many of our strategic main projects at fiscal 2019 and fiscal 2020, we will transition to our long-term main expenditure flow worth of $1 billion at fiscal 2021. We consume some additional complete year assumptions at the emotion and I will point out a few changes. We are completing our KapStone buy allowance allocation and our worth though sum company depreciation and amortization is estimated to exist almost $1.5 billion though the fiscal year, which is at the low goal of our previous guidance range.

I'll now become it aid to Steve though some closing comments. Steve?

Steve Voorhees -- Chief Executive Officer, principal and Director

Thanks Ward. I'm pleased with the further we're making with our customers at implementing our differentiated strategy, and further we're making to deploy main to improve our allowance structure and capabilities. We're doing coarse of this quiet paying a dividend that provides a 4.4% crop and cash flows that are providing us a motorway to reply to our purpose leverage ratio.

We're motivated by the many opportunities at front of us. We're excited by the future, and we're engaged at proactively managing our challenges. We are dirt at what we lack to end to dispatch appraise though our customers and our stockholders.

Now that concludes my prepared remarks. James, we're ready though Q&A?

Questions and Answers:

James Armstrong -- Vice principal of Investor Relations

Thank you, Steve. though a reminder to our audience, to grant everybody a opportunity to ask a question, entertain verge your issue to one, with a follow-up, though needed. We'll obtain to though many though time allows. Operator, can we entertain accept our first question?

Operator

Your first issue comes from the queue of Anthony Pettinari from Citi. Your queue is now open.

Unidentified Participant -- -- Analyst

Good morning.

Unidentified Speaker --

Good morning.

Unidentified Participant -- -- Analyst

With regards to the inventory reduction effort. You talked almost I deem 100,000 tonnes excess inventories at taking down 35,000 tons at January and complete backs, accordingly impartial to exist clear, will you lower another 65,000 tons at the lesson of the belt or could that expend across to next belt impartial test to know the timing.

Jeff Chalovich -- President of Corrugated Packaging

Hey Anthony, it's Jeff. Good morning. So, though Steve mentioned, we consume a great factory outage at the quarter. accordingly we consume at 80,000 tonnes at maintenance downtime. We've taken the 35,000 tons. We won't report almost anything we perform at the future, though it relates to other downtime. We will observe at our inventories at the floor, there's a finite quantity of space at our box plants and warehouses that we will fill, and we'll persist to contest our produce to our customers' demands across coarse of our channels. accordingly I'll say that.

Anthony Pettinari -- Citigroup -- Analyst

Got it, got it. And then impartial at the median allowance reject that was published at Pulp and prose Week. Is it feasible to say what earnings shock that is, if any?

Jeff Chalovich -- President of Corrugated Packaging

Sure. however Jeff, it's de minimis at our world, identical small, beneath $5 million to the sum system. identical few box contracts are tied to it and with our exposure at our containerboard, it's no that much at the outer though our medium. accordingly identical small.

Anthony Pettinari -- Citigroup -- Analyst

Great. I'll become it over.

Operator

Your next issue comes from the queue of George Staphos from shore of America Merrill Lynch. Your queue is now open.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi, thank you identical much. Hi guys, good morning, thanks though the details. Two questions from me; nearer term, you mentioned that box volumes I deem are trending nicely into the fiscal second quarter, I deem you mentioned up 4%, exact me if I'm wrong there. can you equip some incremental disclosure at condition of exit rates at say export volumes, what you're seeing at third feast domestic volumes, confess you had to accept downtime, quiet what you're seeing at condition of shipments there? Then at the other hand, Steve, if we are having this conversation a year from now, and you observe aid at what made though a more successful year or not; what is the one bargain that you've got to govern to here? Is it equip relative to demand? Is it integrating KapStone, though the industry, is obviously at friendly of an interesting point exact now, both within containerboard and the boxboard markets, at condition of equip demand. Thank you.

Steve Voorhees -- Chief Executive Officer, principal and Director

Why don't you accept the first half, Jeff, and then I'll respond.

Jeff Chalovich -- President of Corrugated Packaging

Good morning, George, I'll cover exit rates and what we're seeing. accordingly box remainder strong. We're up at 4% and we shout on our backlogs continuing and we've been that manner across the belt and into this quarter. Ward mentioned earlier sequentially flat we're seeing at our containerboard markets, and I'd say that though our kraft markets, both at export and domestic. What I used to say is, at February, what we've noticed at our backlogs, our orders are at much earlier coming into the goal of January though February. We're coming out of the first quarter. I used to say that we weren't though booked though early at our containerboard export and domestic, and going into the month, we are noise at where we had seen the final few months, at coarse of our backlogs with our containerboard.

Steve Voorhees -- Chief Executive Officer, principal and Director

George, you gave me one thing, and I deem the -- it's maybe difficult to separate one thing. quiet I deem though us, I deem it's indeed clear, I deem we consume to kill at our -- the plans that we have. We've got huge opportunities internally. I deem we've got huge opportunities with our customers. We've got huge opportunities to improve productivity, and accordingly we are impartial -- I deem one year from now, I deem the key bargain though us is executing at the plans that we consume at place.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Okay. I'll become it over. Thank you.

Operator

Your next issue comes from the queue of Brian Maguire from Goldman Sachs. Your queue is now open.

Brian Maguire -- Goldman Sachs -- Analyst

Hey good morning, everyone. impartial a issue at -- again aid to the noise January and the first belt shipment trends. impartial wondering, surprisingly noise relative to -- I deem expectations and friendly of where some of the Fibre Box club numbers were at November, the final ones we had. impartial wondering if you could friendly of grant any comments at what you deem is driving that energy or maybe any goal markets where you're seeing a special uptick at demand? And then impartial class of related to that, Pulp & prose Week spoke of some discounts being made available at the linerboard impartial too. Could you equip any color at why you deem that energy exist the case, given the noise shipment numbers you're talking about?

Jeff Chalovich -- President of Corrugated Packaging

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